Fewer reductions ahead as Fed cuts by a quarter point.

The Federal Reserve decreased its key interest rate by a quarter percentage point on Wednesday, marking the third consecutive reduction and including a warning about future cuts.

The Federal Open Market Committee reduced its overnight borrowing rate to a target range of 4.25%-4.5%, bringing it back to the level it was at in December 2022 when rates were rising.

Despite the lack of excitement surrounding the decision itself, the primary concern had been about the Fed's future signals regarding its intentions as inflation remains above the target and the economy is growing steadily, which are typically not conditions that lead to policy easing.

The Fed's 25 basis point cut in 2025 is expected to occur only twice, according to the "dot plot" matrix of individual members' future rate expectations. This indicates a significant reduction in the committee's intentions, as the plot was last updated in September.

Officials have indicated that there will be two more cuts in 2026 and another in 2027. In the long term, the committee expects the "neutral" funds rate to be 3%, which is 0.1 percentage point higher than the September update. The rate has gradually increased this year.

Since the previous meeting, one FOMC member has dissented: Cleveland Fed President Beth Hammack advocated for maintaining the previous rate, while Governor Michelle Bowman was the first governor to vote against a rate decision since 2005.

Overnight lending rates among banks are determined by the fed funds rate, which also impacts various types of consumer debt, including auto loans, credit cards, and mortgages.

The post-meeting statement was mostly the same, except for a minor adjustment to the "extent and timing" of future rate changes, which was different from the November meeting.

Despite the committee raising its full-year GDP growth projection to 2.5% in September, officials anticipate that GDP growth will slow down to its long-term projection of 1.8% in the following years.

The committee lowered its expected unemployment rate to 4.2% this year, while headline and core inflation according to the Fed's preferred gauge were pushed higher to respective estimates of 2.4% and 2.8%, slightly above the September estimate and above the Fed's 2% goal.

The committee's decision is made with inflation remaining above the central bank's target, despite the Atlanta Fed projecting the economy to grow at a 3.2% rate in the fourth quarter and the unemployment rate remaining around 4%.

Officials are concerned about keeping interest rates too high and potentially slowing down the economy, even though the conditions would be most consistent with the Fed hiking or holding rates. Despite contradictory macro data, a recent Fed report indicated that economic growth had only increased slightly in recent weeks, with inflation decreasing and hiring slowing.

Jerome Powell, the Fed Chair, has stated that the rate cuts are aimed at adjusting policy to account for the current conditions, as it is no longer necessary to be as restrictive.

Since September, the Fed has cut benchmark rates by a full percentage point with Wednesday's move, which was an unusual step of lowering by a half point. The Fed typically moves up or down in smaller quarter-point increments when considering the impact of its actions.

Despite the aggressive moves lower, markets have taken the opposite tack.

During the period, both mortgage rates and Treasury yields have increased significantly, suggesting that markets are doubtful about the Fed's ability to reduce rates further. Specifically, the 2-year Treasury yield has recently reached 4.215%, which is within the upper range of the Fed's rate increase on Wednesday.